In Kahn v. M&F Worldwide Corp., the Delaware Supreme Court unanimously affirmed the Court of Chancery’s decision that the business judgment standard, rather than the entire fairness standard of review, applies to controller freeze-out mergers where the controller’s proposal is conditioned at the outset on both Special Committee approval and a favorable majority of the vote. The Court found that the dual protection measures instituted at the outset of the acquisition process sufficiently protected the minority shareholders’ interests.
The Court adopted the new standard articulated by the Court of Chancery, holding that business judgment review would only be available if all of the following conditions are met:
- The controlling stockholder from the outset makes the merger contingent on the approval of both a special committee and a majority-of-the-minority stockholder vote;
- The special committee is comprised of independent directors;
- The special committee is empowered to definitively reject the proposal, and to freely employ its own legal and financial advisors;
- The special committee meets it duty of care; and
- The minority is fully informed and uncoerced.
Failure to meet any one of these criteria would, under the Court of Chancery’s reasoning, result in applying the entire fairness standard to the transaction. The Court agreed and stated that “[i]f a plaintiff can plead a reasonably conceivable set of facts showing that any or all of [the] enumerated conditions did not exist, that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery.”
The framework articulated by the Court of Chancery and affirmed by the Delaware Supreme Court has already been applied in other cases. For example, in Southeastern Pennsylvania Transportation Authority v. Volgenau, the Court of Chancery held that the same conditions were sufficiently protective of shareholders’ interests in a sale to a third party that the transaction need not be evaluated under the entire fairness standard. The Court of Chancery noted that this case, along with MFW, “serves as an example of how the proper utilization of certain procedural devices can avoid judicial review under the entire fairness standard and, perhaps in most instances, the burden of trial.”
These cases serve as reminders that directors who put shareholder interests first, even in the controller freeze-out context, will be rewarded for their efforts through the application of the business judgment standard. On the other hand, directors who do not protect the rights of their minority shareholder from the outset of the controller freeze-out transaction will be forced to justify their conduct under the entire fairness review